Earnings Preview: Southern Co. (SO)

One of the largest electric utility holding companies in the U.S., Southern Company (SO) is expected to report its second-quarter 2010 earnings on Wednesday, July 28, 2010, before the market opens. The Zacks Consensus Estimate for the second quarter is 59 cents per share.

Previous Quarter Recap

Southern’s first-quarter 2010 earnings per share came in at 60 cents, beating the Zacks Consensus Estimate of 44 cents and the year-ago profit of 42 cents. The strong result was driven by improvement in industrial activity and higher usage on the back of colder-than-normal temperatures, partially offset by a rise in expenses.

Total revenue for the quarter was up 13.4% year over year to $4,157 million and surpassed the Zacks Consensus Estimate by 12.3%. On a year-over-year basis, the company’s retail sales increased 10.3%, with residential sales climbing up a solid 20.6%. However, commercial sales and industrial sales registered a minor year-over-year growth of 3.4% and 6.7%, respectively.

As of March 31, Southern had cash and cash equivalents of $339.0 million and long-term debt totaled $18,097.9 million. The company incurred a capital expenditure of $1,054.0 million during the quarter.

Agreement of Analysts

Over the last 7 days and 30 days, the analysts have showed a positive sentiment toward Southern’s second-quarter 2010 outlook. In the last 30 days, out of the 15 analysts covering the stock, 4 analysts have raised their estimates for the second quarter of 2010, while none of the analysts slashed the estimate for the same quarter. In the last 7 days, 1 analyst has revised the estimate upwardly, while none of the analysts has
decreased it.

The analysts remain optimistic about the company, given the improvement in industrial activity and continued stabilization of the economy. They expect the company to benefit from the robust economic demand and believe that the company’s capital expenditure program is focused on transmission, distribution and generation facilities, which will further increase efficiency and production.

Magnitude of Estimate Revisions

Taking into effect the analysts’ upward earnings revision, the Zacks Consensus Estimate for the second quarter of 2010 shot up slightly to 59 cents from the earnings estimate of 58 cents over the last 7 days and 30 days.

Surprise History

With respect to earnings surprise, Southern shows a favorable trend in the last 4 quarters. The company has recorded positive surprises in the trailing 4 quarters with the minimum surprise of 1.0% in the third quarter of 2009 to the maximum of 36.4% in the first quarter of 2010. However, on an average basis, the earnings surprise was a positive 11.0%. Based on the current flow, we expect the company to come up with healthy results in the
to-be-reported quarter.

Our Recommendation

We believe that Southern will be able to generate steady earnings and dividend growth in the coming quarters through its reliable power contracts. We are also impressed by the Company’s improving balance sheet, an excellent record of operating performance, a regulated profile and sufficient levels of cash flow to support future capital expenditures.
However, considering the apprehensions about economic conditions and growth in Southern’s service territory along with the absence of any significant catalyst, we are compelled to hold on to the Neutral recommendation for the long run.

With an expectation that the stock will perform in line the broader U.S. equity market over the next one to three months, Southern is currently rated as Zacks #3 Rank (Hold).

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